Sometimes the cure is worse than the ill: an occasional look into the life of LSE DESTIN 2010

How Africa Could Win Out on iPhone Work

Hon Hai, the Taiwanese company which owns Foxconn, is one of the largest private employer in the world. It is the world’s largest contract manufacturer, it assembles 40% of the world consumer electronics for customer like Amazon and Dell and employs 1.4 million people: governments around the world are craving to get these jobs to their countries. Foxconn represents the typical company an African country should try to attract and/or replicate: low-skilled light contract manufacturing firms which assemble the components of products designed, marketed and sold (in most of the cases) elsewhere (e.g. iPhones and iPads). Many think that the comparative advantage of companies such as Foxconn is the ability to draw on a steady supply of cheap workers: Foxconn train them from scratch in low-skill tasks and has them working on long shifts. China however is rapidly ageing and this is shrinking the supply of young workers. This in turn is driving up the costs of labor and it is squeezing the profit margin of companies operating in China like Foxconn. If this trend continues, these jobs will have to go somewhere else soon. According to many, African countries are good candidates because they have a vast pool of cheap labor (see John’s post here). I am curious to find out from readers out there what in their views African governments should do to attract the low-skilled manufacturing jobs of the kind that Foxconn has now in China. Below are some of the caveats which I think those advocating for low-skills light manufacturing in Africa should address.

Manufacturing (source technologywize.wordpress.com)

It’s Not Just About Cheap Labor. A NYT’s report on Apple made it clear: Apple’s choice to manufacture iPhones and iPads in China is about scale, flexibility, diligence and industrial skills. An anecdote told by the NYT is particularly telling: Apple finalized the design of an iPhone just weeks before it was due on the shelves but Foxconn’s Chinese factories were able to have their workforce working on 12 hours shift to produce over 10,000 iPhones a day. Speed and flexibility are a function of abundant cheap labor yet also depend on workers skills and organization in place: this cannot be matched easily and therefore the scale and the flexibility is difficult to be replicated overnight in Africa.

Downstream and Upstream. Faced with shrinking net income margins, Foxconn is adopting a variety of medium-term strategies: it is expanding in inland China where the labor is cheaper and is expanding in Brazil and Mexico (I assume for its proximity to the US market). It is also doing something else: it is trying to move up and down the value chain. Assembling screens to produce iPod yields a profit, designing and retailing iPod gives ten times that profit. Foxconn is trying to move beyond assembling screens towards making screens. It is also trying to use its supply-chain networks to help its branded customers promote their products in China. If these strategies work then Foxconn will be able to keep booming while maintaining these jobs in China (despite rising labor costs). This will postpone and not eliminate the necessity to offshore: but how long African countries can wait?

Robots for Workers. In order to keep labor costs down Foxconn is doing something else: it is replacing workers with robots. It recently unveiled the plan to hire 1m robots by 2013. Automation has the potential to improve the efficiency of its production line and can shortcut the demand of workers for better wages and better working conditions. Producing more with less workforce is part of the productivity enhancement which makes workers richer. It has however the consequence to reduce the number of workers needed too. As the world moves towards automation also in low-skills manufacturing and iPhone will be assembled by robots, jobs in low skills manufacturing might not be there when Africa gets its turn.

Keeping these caveats in mind, what can African governments (also those with a small domestic market) do to promote low-skill light manufacturing industry?[1]